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Proxy fight!

Also: more evidence piles up about the risks associated with buying bonds right now

When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at

Jan 31, 2013

by Max Fawcett

A British Columbia-based activist investor is trying to block the proposed merger of Pace Oil & Gas (TSE:PCE), AvenEx Energy (TSE:AVF) and Charger Energy (CVE:CHX). As the Calgary Herald reported yesterday, Nova Bancorp Securities, which has a position in Pace Oil & Gas, doesn’t think the company’s assets are being properly valued in the transaction. In an email released Monday, Jack Muir, the vice-president and director of Nova Bancorp, singled out the limited sale process and the fact that Charger has directors in common with Pace as factors behind his decision to try to start a proxy fight.

Tom Buchanan, the CEO of Charger Energy and the man poised to become the CEO of the merged entity, Spyglass Resources, didn’t sound like he was willing to back down. “I’m a little surprised that they would take this route,” he told the Herald’s Dan Healing. “We’ve been out on the road and I’ve met with about 50 institutions over the last two weeks and we’ve done a number of retail presentations and I’ve taken a lot of calls and, by and large, the people we’ve talked to have been supportive of the transaction . In our view, we’ve done all of our homework.” The shareholders of all three companies will vote on the proposed transaction at special meetings held on February 19 in Calgary.

Meanwhile, the dangers lurking in the bond market continue to grow by the day. No less an expert than Goldman Sachs (NYSE:GS) has decided to reduce its exposure to the bond market. The firm’s recent Q4 2012 earnings announcement revealed, among other things, that the amount of money Goldman could lose on a given day as a result of a change in interest rates had dropped from $123 million a year earlier to $67 million. As Fortune’s Stephen Gandel writes, the move reflects the increasingly cautious tone that Goldman has been striking when it comes to bonds of late. “The moves mirror cautious statements recently made about the bond market by Goldman’s two top executives. Last week, at the World Economic Forum in Davos, COO Gary Cohn, who is the firm’s No. 2 executive, warned that many banks and investors might not be prepared for the possibility of a ‘significant repricing’ in the bond market….[and] in December, Goldman’s CEO Lloyd Blankfein said at a conference sponsored by New York Times that the risk of a bond market crash was growing and that investors appeared unprepared. What’s more, Blankfein said Goldman was advising clients to increase their borrowing to take advantage of low rates.”

And over at the Globe and Mail, reporter Boyd Erman has a fascinating primer on the meaning of bond convexity (no, really – it is fascinating) and what it means for investors. “In as much of a nutshell as is possible with bond math, convexity is a term for the shape of the curve representing the relationship between a bond’s price and its yield,” Erman writes. “Yields rise when prices fall, and vice versa. But the relationship is not linear; on a graph it will look like a curve. For most bonds, the shape of the curve means that as yields approach zero, price gains accelerate. That’s been helping investors who are buying bonds of late, as declining yields that are getting close to zero on many issues have resulted in nice gain in the value of bonds, adding a little extra juice to returns in the form of capital gains.”

That’s what’s happened lately. Here’s what could happen next. “The reverse is true when yields that are close to zero begin to rise. Price declines in bonds that exhibit convexity will be steeper when the bond yield is moving from, say, 1 per cent to 2 per cent than when the yield is going from 8 per cent to 9 per cent.”

In other words, it’s not just that bonds will decline in value when interest rates start to head north again. It’s that, because of where they’re at on their convexity curves, they’ll inflict the most pain on the people holding them in the short term as they retrace that steeper part of the curve.

Erman explains it in more and better detail, and it’s well worth a read. It’s behind the Globe and Mail’s paywall, but you’re subscribed to that, aren’t you? If not, well, get on it.



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